The last, and most obvious, installment in our analysis of economic capital’s effect on realizing the American Dream explores financial capital.
Financial Capital: The zeroes in your savings account
In the context of intergenerational mobility, referring to how children go up (or down) the economic ladder compared to their parents, financial capital deals with how many zeroes are in the family bank account, including homes and other physical assets that can be passed down. Our family’s wealth is the most important determinant in how financially secure we become.
If there are enough zeroes in the family bank account (assuming the family member in charge of that account is not a complete schmuck), loans at a very low, perhaps non-existent, interest rate become accessible, secret savings accounts are created behind the children’s backs, and access to a community with higher social and cultural capital becomes the norm.
Buy a home
Owning a home is a cornerstone in building individual wealth, in particular for those at the lower rungs of the economic ladder. Owning a home means you have a type of equity capital. Though it’s non-liquid (not immediately transferable into cash), it is still a source of financial capital.
According to the Pew Charitable Trusts, “Parental homeownership not only leads to greater wealth for the parents, but is also shown to increase educational attainment for children, especially children of home-owning, low-income parents.”
Today, the homeownership rate in the United States is roughly around the same as it was in 1965. While more than 85 percent of folks in the top 20 percent income bracket own their homes, only 38 percent in the bottom 20 percent do.
With homeownership being such an important source of wealth for low-income earners, this low percentage is one of the main reasons why economic mobility for millennials seems to be so tough these days.
Debt ain’t so bad
Debt capital is often given a bad rap, like those that take the Credit Suisse Global Wealth Report and claim that “If you have no debts and $10 in your pocket, you are wealthier than 25 percent of Americans.”
But that scare tactic is shying away from the fact that debt is largely to thank for all the nice things we have these days, like the light bulb, washing machines and iPhones. It has allowed start-up companies to blossom into very successful ones. Google, Apple, Snapchat, Uber — OK pretty much any business you can think of — has used debt capital to fund their innovations and/or to expand production, helping them flourish. And, despite the straight-up disgust we have toward the cost of higher education, student loans have actually helped a whole bunch of people, particularly those who have graduated, become better off than those without a degree.
Indeed, debt capital is a dual-edged sword that can also hinder economic mobility. Folks who take out student loans and don’t graduate or who spend beyond their means with a credit card can confirm. Nonetheless, “smart” debt is necessary for economic growth and for our individual economic mobility.
Build your wealth
So, build your own wealth. There are a slew of Fintech vehicles that help you create your own nest egg. Adding some kind of savings account with a nice return, such as an exchange-traded fund, mutual fund or Traditional and Roth IRAs, to your monthly budget will get you well on your way to building financial capital. It’s also a good idea to see about buying a home for the reasons listed above.
Also, a good credit score can take some time to build, but it is essential to having access to financial capital. Start by taking out a credit card with a small credit limit and using it right away, being sure to pay the monthly payment every month. After a little while, your reputation for paying off your debts improves opening up access to larger piles of money.
Unsurprisingly, parental income and wealth — the most crucial source of financial capital — greatly affects the accumulation and value of other forms of capital (social, human and cultural) that help the next generation’s upward mobility. But, if you’ve been dealt a bad hand in this arena, use the other capitals to accumulate your wealth.
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